The South Korean government yesterday intervened to shore up investors' confidence with a $6.6 billion (£4.55 billion) liquidity injection into financial institutions.

After a week in which the South Korean currency (the won) has been in free fall, the central bank also spent at least $200 million in foreign currency to boost the won to 1,710 to the dollar, up nearly 10 won from Thursday.

The authorities also abolished restrictions on long-term overseas borrowing by Korean companies for one year to ease a liquidity squeeze.

Nevertheless the measures were not enough to stop the Seoul bourse plunging 7.1 per cent to an 11-year low of 350.68 points after one of Korea's main brokerage houses, Dongsuh Securities, filed for bankruptcy protection. Mr Lim Chang-yuel, the Korean finance minister, suggested the government might take equity stakes in troubled commercial banks for a two-year period, thus avoiding closure under the terms of the International Monetary Fund bail-out package.

This follows the government rescue this week of Korea First and Seoul Bank, two of the nation's biggest banks, through equity swaps with state-run businesses. The move raised doubts among foreign investors about Korea's commitment to restructure the financial sector.

Analysts said calm was not likely to return to financial markets until next Thursday's presidential election, which might reduce uncertainty about the government's commitment to economic reforms required under the IMF's $57 billion rescue programme.

The government hopes that if the won remains stable, this would ease worries about foreign exchange losses and reassure overseas investors.